Crowdfunding is practiced in other parts of the world and, thanks to the passage of the JOBS Act, is now the law in the United States, although potential market participants are awaiting regulations before declaring themselves open for business.

The term refers to raising capital, typically over the Internet, for private companies or projects that provide investors with some but not extensive documentation. The term is not yet part of the official lexicon in Canada, but there is considerable activity behind the scenes. It’s reasonable to expect that the local activity will heat up once the U.S. regulations are promulgated. Otherwise Canadian companies will head south of the border for funding.

Jim Richardson is a Calgary-based businessman who is working on developing a site — crowdcapital.ca — to facilitate the financing method that has also been used for other types of equity capital raising including pre-funding for tours by rock groups, for the production of CDs and for the financing of films. (Others have set up similar sites.)

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Here’s how it could work in Canada: Private companies would go to the website set up by Richardson and indicate that they want a certain amount of capital. Investors would go to the site and see the investment possibilities. If they like what they see then they could become investors.

What has to be worked out, both here and in the U.S., is the role, if any, the securities regulators will play in the process, given that their main objective is investor protection and that retail investors are the likely target audience. Currently, capital is raised via a prospectus with full disclosure for public deals or via an offering memorandum with limited disclosure for exempt market deals.

“So you are raising, say $2,000, from a bunch of people you don’t know under perhaps a new exemption,” said Richardson, while indicating there would be some, but limited disclosure about the company. “It may be three or four pages that would not be a cost burden on the company but gives the investor the information about what they are investing in — and the risks. And potential investors could ask for more information.”

It’s needed because it allows entrepreneurs to source more available capital faster than otherwise

Richardson said that in his view, equity crowdfunding is ideally suited for private companies that need at least $200,000. For a typical start-up company, the first $200,000 usually comes from friends and family. “Up to $200,000 is doable,” he said. The next $300,000 – $500,000 is the problem. “It’s in the gap,” because it’s too small for the venture capital firms to get involved.

For issuers the main advantage is raising capital that otherwise may not be available. “You get to raise the money you are looking for. You can’t go to the bank, you can’t go to a venture capital firm. This is a way of raising capital efficiently and cost effectively,” said Richardson, who would receive a commission based on the amount raised and who would do some vetting of potential issuers.

Richardson has some allies. The Canadian Advanced Technology Alliance is also involved in furthering the idea that it describes as “social media meets finance.” The alliance has formed a working committee, InvestcrowdfundCanada, and is actively telling the story to securities regulators. “It’s needed because it allows entrepreneurs to source more available capital faster than otherwise and also because of the trend to declining investment into early-stage companies,” said Cindy Gordon, chairwoman of the working committee. “It works elsewhere so it should work in Canada.”

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